South Africa’s 22-Cent Debt Burden: Why a VAT Hike May Be Inevitable

For every rand the South African government spends, 22 cents goes toward paying off debt—a figure significantly higher than in peer economies. This high debt servicing cost raises borrowing costs for businesses and households, limiting economic growth and job creation.

One of the biggest takeaways from the 2025 Budget Speech by Finance Minister Enoch Godongwana is the government’s plan to stabilize debt at 76.2% of GDP in 2025/26 while gradually reducing the budget deficit to 3.5% by 2027/28.

However, reducing the debt burden comes with a major challenge: the government needs more revenue. This has led to a controversial proposal—a VAT hike to 15.5%, which is seen as the least harmful way to generate additional funds.

Why Is South Africa’s Debt So High?

South Africa has one of the highest debt service burdens in the world. The National Treasury acknowledges that stabilizing this debt is crucial for long-term financial health, but the country also needs to avoid excessive taxation that could slow economic growth.

VAT Hike: The Least Harmful Tax Increase?

According to PwC’s 2025 Budget Review, the proposed 0.5% VAT increase would generate:

• R13.5 billion in additional tax revenue in the 2025 fiscal year

• R43 billion over the next two years

Compared to increasing Personal Income Tax (PIT) or Corporate Income Tax (CIT), a VAT hike is seen as less damaging to economic and employment growth.

PwC highlights that:

• South Africa’s PIT and CIT rates are already high compared to similar economies

• VAT rates in upper-middle-income countries average around 18%, making South Africa’s current 15% rate relatively low

• Increasing PIT and CIT in the past did not generate the expected revenue and even reduced tax compliance

Alternatives to VAT Hikes

PwC suggests that instead of increasing VAT, South Africa could explore other ways to boost revenue without hurting consumers.

1. Closing the Tax Collection Gap

The South African Revenue Service (SARS) has been given a R3.5 billion boost to improve tax collection. Experts estimate that South Africa loses R400 billion to R450 billion in potential tax revenue annually due to non-compliance.

Even recovering just 10% of this lost revenue could add R45 billion to the national budget—more than triple what a VAT increase would generate.

2. Renegotiating the SACU Revenue Sharing Agreement

South Africa loses R73.5 billion annually through its contributions to the Southern African Customs Union (SACU), which distributes customs revenue among member countries (Botswana, Eswatini, Lesotho, Namibia, and South Africa).

While SACU members rely heavily on these funds (with 30-40% of their government revenue coming from SACU payments), PwC argues that the current system is unsustainable for South Africa.

Negotiating a fairer revenue-sharing model or even withdrawing from SACU could help South Africa retain more revenue without taxing citizens further.

The Bigger Problem: A Shrinking Economy

Ultimately, tax hikes alone won’t solve South Africa’s debt crisis. The real issue is stagnant economic growth.

With the economy projected to grow by just 0.6% in 2024, while population growth exceeds 1.0%, South Africans are effectively getting poorer every year.

Instead of relying on tax increases, experts argue that structural economic reforms, investment incentives, and job creation should be prioritized to increase revenue organically rather than through more taxation.

The Bottom Line

While a VAT hike to 15.5% may be the least damaging tax increase, it still places an extra burden on consumers already struggling with high living costs.

If SARS improves tax collection and the government renegotiates SACU contributions, South Africa could avoid further tax hikes while still stabilizing its debt.

For now, South Africans will have to brace for potential tax changes as the government attempts to navigate one of the country’s toughest financial crises.

Would you support a VAT increase, or should the government focus on alternative revenue solutions? Let us know your thoughts.

{Source BusinessTech}

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